DP-2 policies are the second of the three dwelling property or landlord insurance policies available on the market. They are the middle ground between the more basic DP-1 policy and the more comprehensive DP-3 policy. It is a policy that better protects a landlord than DP-1 but still saves on the cost of a more comprehensive DP-3 policy.
- DP-2 home insurance policies typically cover 17 named perils
- DP-2 policies are used to cover properties that are actively being rented out
- DP-2 insurance policies provide dwelling and other structures coverage on a replacement cost value basis and personal property claims on an actual cash value basis
What is a DP-2 landlord insurance policy?
DP-2, like DP-1 and DP-3, is a landlord insurance policy. This means that it is designed to be purchased by and protect a landlord for a home or property that they do not currently occupy but rather rent out to others. DP-2 is good coverage for landlords that are renting out a property they own. The coverage is extensive but not as robust as DP-3. If a landlord is looking to have adequate protection but save on some costs, this type of policy is a good option for them.
DP2 policies work in a somewhat similar manner to the HO-2 homeowners insurance that covers 16 named perils. Although it is not an exact comparison, it is fairly close in what is covered and to what extent the landlord is covered.
What is covered under a DP-2 policy?
There are named and open peril policies that exist in the home insurance market. Named perils cover all perils specifically listed in the policy and exclude all others, whereas open perils cover all perils that are not explicitly excluded in the policy.
DP-2 policies are on a named perils basis like that of DP1, but DP2 is more comprehensive in what perils are covered with 17 commonly covered perils listed. These covered perils include:
- Fire and lightning
- Wind and hail
- Riot or civil commotions
- Damage from aircraft
- Damage from vehicles
- Damage from falling objects
- Smoke damage
- Weight of ice, snow, or sleet
- Sudden and accidental water or steam discharge
- Cracking or bulging of built-in appliances
- Broken glass
- Frozen pipes
- Electrical damage
- Vandalism and malicious mischief
It is important to note that some insurers may include additional coverages in their DP-2 policies are exclude one or more of the above. Policies may differ from location to location in terms of their coverage and cost as well. It is important to read through and understand what you are covered for under your specific policy.
Fair rental value coverage
Something else that is covered by a DP-2 policy and is not covered under DP-1 is the fair rental value of the property. This coverage is unique to DP-2 and DP-3 policies as this is not something typically covered under standard home insurance policies. Fair rental value coverage provides the landlord with protection for lost income from renting out the property, due to damage from a covered peril. This section of coverage will typically provide the landlord with the income that they would have received from a renter that would have been renting the property had it not been damaged. This can be a very important coverage for a landlord to make sure they have as damage to a rental property can take away a major income source of rent payments.
What is not covered under a DP-2 insurance policy?
While more comprehensive than a DP-1 policy, DP-2, just like all other home insurance policies has some typical perils that are not covered. Some of these perils include:
- Earthquakes and other ground movement
- Gradual water damage
- Normal wear and tear
Again, it is important to read through your specific policy to see what is excluded from coverage in your individual case as it may differ from the list above.
Another key piece to keep in mind about DP-2 insurance is that vacant homes meaning homes that are unoccupied for usually 30 days or more, are also excluded from coverage. Insurance providers typically exclude vacant homes from coverage as it is easy for minor damages to turn into major damages as the result of no one being in the home to identify the damage and try to repair it in a timely manner. This is a difference between DP-1 and DP-2. As a landlord, if you plan to have extended absences in excess of 30 days at a time, a DP-1 policy may be a better fit for you.
Unlike a standard home insurance policy, a DP-2 policy does not usually provide personal liability coverage or medical payments to others coverage. This may open up the landlord to some personal liability. Luckily, many insurers will provide these coverages as an add-on. If you are looking for more peace of mind as a landlord, adding on these coverages may be worthwhile.
DP-2 landlord insurance reimbursement limits
Reimbursement limits for covered claims under DP-2 policies are comparable to the standard HO-3 home insurance policies. Section A and B (dwelling and other structures coverage) reimburses a homeowner on a replacement cost value basis and section C (personal property coverage) on an actual cash value basis.
Actual cash value reimbursement provides less coverage over time compared to the replacement cost value reimbursement, because it factors in depreciation over time. Depreciation for various categories of items such as dwellings, varies. There are useful lives for each category of items that are set by the IRS. Those numbers are used in the calculation that insurance companies use to calculate the depreciation as time goes on. The actual cash value basis means that the initial coverage limit stated in the policy will decrease as time goes on and the dwelling or other item has less “useful life” left.
An example of this is an initial $250,000 coverage limit to replace a house, decreases down to $0 eventually. Let’s say that depreciation is $10,000 per year in this case and damage occurs to the home 10 years into the policy. At this point in time, the maximum the insurance company will pay out is $150,000 ($250,000 – ($150,000 * 10 years)).
On the other hand, the replacement cost value basis will not factor in depreciation to the maximum coverage limit as time goes on. If damage occurs to the $250,000 home 10 years into the policy as in the example above, the maximum coverage limit will still be $250,000.
These are simplified examples of how this works, but they show that there can be a major difference in the dollar amount that is covered between the two types of ways companies provide reimbursement to a homeowner. Of course, with the actual cash value basis providing less coverage than replacement cost value, it will be a cheaper premium cost to the homeowner than replacement cost reimbursement.
When a DP-2 policy might be the right fit
A DP-2 policy is the right fit for a landlord who owns a property that they are actively renting out. It is an especially good fit if the landlord is looking to save on costs but to still have adequate coverage. Talk with your insurance agent about which policy may be the right fit for you.